Telecom Market in Indonesia April 2013 Table of contents . Key highlights 2-5 . Market size and growth 6-9 . Competitive landscape and key players 10-13 . Political, economic and regulatory environment 14-16 . M&A scenario in Indonesia 17-18 © 2013 KPMG International, an Indian Partnership and a member firm of the KPMG network of independent member firms 1 affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Key Highlights Key highlights of the Indonesian telecom market Market overview: size, key players and outlook Indonesian telecom market Revenue, subscribers and penetration Key players Market outlook Key fixed-line players* 3.7 bn1 | 43.8 mn2 | 17.6 4.1 bn | 46.9 mn | 18.3 Fixed Telkom Revenue Fixed-lines Fixed-lines per Indosat Revenue Fixed-lines Fixed-lines per 100 people 100 people 2012 2012 2012 Bakrie Telecom 2015E 2015E 2015E Key mobile players* Telkomsel 14.1 bn | 329.7 mn | 129 11 bn | 266.4 mn | 107 Indosat Subscribers per Mobile Revenue Subscribers Subscribers per Revenue Subscribers 100 people XL Axiata 100 people 2012 2012 2012 2015E 2015E 2015E Hutchison 3 Axis Smartfren (post merger of Mobile-8 and Smart Telecom, which earlier operated independently in the market) Sampoerna Telekom (STI) 53.4 mn | 4.3 mn | 3.4 mn 93 mn | 7.4 mn | 5.6 mn Internet3 * Most of the fixed-line and mobile operators Internet Internet Broadband Internet Internet Broadband users subscribers subscribers provide internet services and are focusing on users subscribers subscribers 2012 2012 2012 data revenue as a key growth driver. 2015E 2015E 2015E Note: 1 Billion 2 Million 3 Internet services would be a subset of fixed and mobile services, as internet would either be provided through fixed or wireless networks. However, it is mentioned separately as the split of internet users among fixed and mobile internet is not available. Source: The Economist Intelligence Unit, accessed on 15 April 2013 © 2013 KPMG International, an Indian Partnership and a member firm of the KPMG network of independent member firms 3 affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Key highlights of the Indonesian telecom market Market trends Shift from fixed to mobile ■ There is a continuous shift from fixed to mobile services, particularly in voice and data services, resulting in slower fixed line services revenue growth. Dominance of prepaid ■ Indonesia is a prepaid customer dominated mobile market. Telkomsel, the largest mobile telecommunications provider in mobile customers Indonesia, had 104.8 million prepaid customers in 2011, compared to just 2.1 million postpaid subscribers. ■ As voice and SMS services flatten, operators are trying to grow their businesses beyond telecommunications (non-voice or substitute products), such as internet data access and application stores. Mobile operators are introducing value added services Efforts to diversify service (VAS) to leverage the shift in consumer preferences from fixed to mobile services. portfolio to include more ■ In 2011, Telkomsel introduced Tap Izy, the first mobile contactless payment system in Indonesia, by which customers can use non-voice offerings their own phone as an electronic wallet. ■ In January 2011, Telkomsel, in cooperation with Google, launched Business Connect. Available as a hosted push-mail service, Business Connect assists customers to easily manage all of their corporate activities. ■ Fixed-line and mobile services are also facing Mobile VoIP usage, January 2013 increasing competition from over-the-top (OTT) VoIP user VoIP time spent Sessions per Country services (for example Line and KakaoTalk apps). A percentage (minutes per month) month report from Arbitron Mobile revealed that Indonesians Japan 68.2% 386.5 222.4 used more voice over Internet Protocol (VoIP) and chat Indonesia 40.9% 134.9 65.9 apps in January 2013, beating the usage rates in the Increase in competition UK 22.1% 79.2 35.1 from OTT services UK, the US, Germany and China. US 16.5% 77.6 35.6 ■ Indonesian telcos may come up with their own cross- 27.0% 68.1 31.8 platform messaging app ‘Messaging Indonesia’ along Germany with the Indonesian Telecommunication Regulatory France 17.4% 65.2 34.3 Authority (BRTI) to counter the intensifying competition China 16.4% 26.6 27.2 from OTT services (apps). Source: Arbitron Mobile Trends Panels Service, Persons 18+, January 2013 Source: The Economist Intelligence Unit, accessed on 15 April 2013 © 2013 KPMG International, an Indian Partnership and a member firm of the KPMG network of independent member firms 4 affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Key highlights of the Indonesian telecom market Challenges Geographical spread and ■ Indonesia comprises 17,000 islands between Asia and Australia, representing a unique geographical challenge for telcos in related coverage issues expanding their network coverage. Indonesia’s tower market still has significant geographical expansion remaining. ■ SIM card penetration in Indonesia has already reached over 100 percent, leaving little room for operators to grow their High SIM card penetration customer base from basic voice or SMS service. Mobile subscriptions per 100 people reached 107 in Indonesia in 2012. Change in accounting ■ Recent accounting changes to classify tower leases from operational to financial is expected to result in higher depreciation and policies for leasing amortization, and interest costs and lower financing cash flows. In addition, the accounting change would result in lower towers operational and maintenance costs and higher operating cash flows. Increase in capital ■ An additional issue is bringing network quality to a level that encourages data use due to positive user experience. This implies expenditure to improve significantly higher capex before customers see enough value to increase data spending. network quality ■ While Indonesia’s underdeveloped telecom market and large population are an attractive proposition to foreign investors, corruption and government bureaucracy continue to be factors that discourage potential investors. High levels of corruption and government ■ Global network exchange provider Epsilon announced plans to build a data centre with a partner in Jakarta in 2011. The bureaucracy project, however, was subsequently abandoned. One of the challenges voiced by Andreas Hipp, CEO of Epsilon, was licensing. “We’ve found that it is almost impossible to obtain an international licence, and approval for simple business licences can take a long time, unless you to go down the route of paying ‘expedite fees’ which is an issue for us,” he explained. Source: The Economist Intelligence Unit, accessed on 15 April 2013; NOMURA International analyst report on PT Telkom; Paul Budde report on the the Indonesian telecom market, 2013 © 2013 KPMG International, an Indian Partnership and a member firm of the KPMG network of independent member firms 5 affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Market Size and Growth Telecom market in Indonesia Fixed-line market: market Size and Growth Although Indonesia has been working steadily to build a solid foundation of improved telecom infrastructure, the national fixed-line tele-density has remained low over the years. Fixed-line telecom market revenue and growth, 2008‒15E Fixed-line telecom subscribers, 2008‒15E 5 40 50 20 Fixed telephone lines 32 4 per 100 people 24 40 3 16 16 30 2 US$ billionUS$ 8 Percentage 12 20 1 0 0 -8 10 8 2008 2009 2010 2011 2012 2013E 2014E 2015E Fixedtelephone lines (millions) 2008 2009 2010 2011 2012 2013E 2014E 2015E Revenue (US$ billion) Revenue growth (percentage) Fixed telephone lines Fixed telephone lines per 100 people Source: The Economist Intelligence Unit, accessed on 15 April 2013 Source: The Economist Intelligence Unit, accessed on 15 April 2013 Key findings . The fixed-line network started expanding significantly in 2005, increasing 33.6 percent y-o-y to reach 13.1 million (about 6 percent tele-density) fixed telephone lines. The growth was primarily driven by the extensive deployment of fixed-wireless technology, signalling a new approach to the expansion efforts. By 2010 fixed-line numbers had reached 39.1 million and about 80 percent of these were fixed-wireless-based services. The growth rate eased in 2011 to 7.1 percent, as the total number of fixed-lines reached an estimated 41 million. According to Pyramid Research and The Economist Intelligence Unit, the growth in fixed telephone lines will drop further to 2 percent y-o-y in 2017, when the total lines are expected to reach 48.7 million. The decline in growth can be attributed to the shift in consumer preference toward mobile services and the increasing competition from OTT voice services. The increasing shift toward mobile services can be highlighted using the fact that fixed services comprised just 13 percent of the total telephone subscriber base in 2011, compared to 1998 when mobile services accounted for only 15 percent of the total market. © 2013 KPMG International, an Indian Partnership and a member firm of the KPMG network of independent member firms 7 affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Telecom market in Indonesia Mobile market: market Size and Growth A particularly strong feature in the Indonesian telecom market has been the strong expansion in its mobile